Pension and Other Post-Employment Benefits

Creating a Sustainable Retirement Benefit System

The Patrick-Murray administration
is continuing to take a comprehensive approach to addressing the fiscal
challenges associated with the Commonwealth’s pension and Other Post-Employment
Benefits (or “OPEB”) liabilities. The state currently has an unfunded pension
liability of $20 billion and an unfunded OPEB liability of $15 billion.
Municipal governments are also faced with significant unfunded pension and OPEB
liabilities. The Governor’s recent proposal to modernize and further reform the
state’s pension systems would result in significant pension cost savings to
state and local pension systems and help to ensure the long-term sustainability
of these pension systems. This proposal would also reduce future costs
associated with OPEB - as a result of an expected increase in retirement ages –
and build on the administration’s ongoing efforts to address unfunded OPEB
liabilities. The Governor is also proposing additional measures to increase retirement
liability funding and oversight of OPEB.

Pension Reform to Ensure a Sustainable System

The Governor filed legislation on
January 18, 2010 for additional pension reform and benefits modernization that
builds on previous pension reform legislation enacted by the Governor and the
Legislature. The benefits modernization proposals that would impact
prospective employees include: raising retirement ages, eliminating early
retirement subsidies and increasing the period for average earnings used to
calculate the pension benefit from three years to five years. The legislation
also includes reforms to prevent abusive practices that enhance benefits at the
end of an employee’s career - including excessive salary increases or changing
jobs to a group with higher benefits – and a proposal to prevent “double
dipping” for certain elected officials, who could otherwise receive both a
salary and a government pension.

The benefits modernization proposals
described above would generate pension cost saving for the Commonwealth in
excess of $5 billion over 30 years, including an estimated $2 billion for
cities and towns. These savings would allow the Commonwealth to reduce its pension
funding schedule by an estimated three to five years and provide similar relief
to cities and towns. The expected increase in retirement ages would also
result in additional savings for future retiree OPEB costs of approximately $1
billion for the state and $1 billion for cities and towns over 30 years. This impact
would build on previous measures to address OPEB liabilities, including the increase
to the share of health care costs for new retirees from 15% to 20%, and the
commitment to deposit 5% of excess capital gains revenue into the State Retiree
Benefits Trust Fund.

Long-Term Liability Task Force Recommendations

The Governor appointed a task
force on long-term liabilities in connection with the budget process last
year. The task force was lead by A&F and solicited input from other
government stakeholders, including the Public Employee Retiree Administration
Commission (PERAC) and the State Comptroller, as well as outside experts. This
effort informed the Governor’s recommendations for pension reform as well as
the additional proposals and recommendations listed below.

Pension Funding: – The state’s updated pension funding
schedule includes a necessary extension to the full funding date, an increase
in funding for fiscal year 2012, and measures to ensure that appropriations
continue to increase in the future. The Commonwealth recently extended its
pension funding schedule from 2025 to 2040 to mitigate an $800-$900 million
increase in the appropriation that would have been required under the previous
schedule. The extension is the result of fully recognizing investment losses that
occurred during the recession, and the 30-year time horizon for full funding is
similar to the length now used by most states. The new schedule does, however,
demonstrate the Administration’s commitment to fully funding pension
obligations by committing $1.478 billion to the pension fund for fiscal year
2012, an increase of $36 million over fiscal year 2011.

The new schedule also includes 5-6% increases
in pension funding during fiscal years 2013 to fiscal year 2017 and would
prohibit any reduction in appropriations during this time frame that would
otherwise be allowed as a result of actuarial gains. Instead, any gains could
only be used to shorten the schedule and as a further measure of discipline, increased
appropriations would still be required to meet the 2040 fully funding date if
necessitated by actuarial losses. This format will ensure ongoing increases in
pension appropriations and mitigate the cyclical problem inherent in funding
schedules where appropriations are often lowered when available resources are
at their greatest.

Dedicated OPEB Funding – The Administration recommends
that the Commonwealth dedicate funds received from the Tobacco Master
Settlement Agreement (MSA) to the State Retiree Benefit Trust Fund (SRBTF), to
be phased in over a ten year period. The state receives nearly $300 million annually
from the agreement. This proposal would require that 10% of this amount be
allocated to the SRBTF in fiscal year 2013 and that the amount be increased by
10% of the total funds received annually, such that 100% of the MSA funds would
be dedicated to OPEB by 2022. This proposal is based on a recommendation of
the 2008 Special Commission that studied OPEB but employs a longer phase-in
period in recognition that the state economy is expected to be several years
from full recovery. This proposal to dedicate MSA funds to the SRBTF has the
added benefit of reducing the state’s dependency on a less predictable revenue
stream, and allows these funds to accumulate investment earnings that will
further mitigate the state’s OPEB liability over time.

Increased Oversight of OPEB – The Administration
recommends that the role of PERAC be expanded, subject to necessary funding, to
include approval and review of the OPEB valuations that are required for cities
and towns. This process will ensure that these valuations are being performed
in a reasonably consistent manner and that policymakers have comparable date to
make informed recommendations to address the OPEB challenge. The
Administration is also recommending additional measures to ensure that
municipalities have access to the state’s investment vehicle for retiree health
care that is overseen by the Health Care Security Trust.